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California Securities Lawyers: Morgan Stanley Ditches the Broker Protocol

By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Tuesday, October 31, 2017.

Erwin J. Shustak, Esq.
619.696.9500 ext. 109
[email protected]

 After 11 years as a member, Morgan Stanley announced it was ditching the Protocol for Broker Recruiting (the “Protocol”) that it joined in 2006 as one of the very first broker-dealers to adopt the Protocol.  This is a major change in a trend that saw the Protocol list of signatories swell from the original four members who created the Protocol in 2004, to the more than 1,200-member firms who are now signatories.

 The original signers of the Protocol were Smith Barney (Citigroup Global Markets), Merrill Lynch, and UBS Financial Services.  The purpose of the Protocol was to “…further the clients' interests of privacy and freedom of choice in connection with the movement of their Registered Representatives ("RRs") between firms”.  Before the Protocol, larger wire house firms like Smith Barney, Merrill and UBS were constantly embroiled in court seeking temporary restraining orders and preliminary injunctions when a broker left one firm and joined another, taking his or her clients with them.  The Protocol, which is only 2 ½ double spaced pages, proscribes the five pieces of information that a departing broker can take when moving from one Protocol to another Protocol firm without fear of litigation from the former firm. That information includes only “client name, address, phone number, email address, and account title of the clients that they serviced while at the firm ("the Client Information")”.

 Morgan joined the Protocol in 2006.  At the time, only a dozen or so firms had signed it and many of the smaller, independent broker-dealers were not members.  The initial idea was to avoid disputes between the major wire house firms, like Morgan, UBS, Merrill and others as brokers left one major firm to join another.  As more and more smaller, independent firms joined, however, the universe of firms that could “cherry pick” and recruit Morgan brokers away from Morgan increased to the point where Morgan and the other major firms were big targets and were losing good producing brokers- and clients- to smaller firms with no legal recourse. The Protocol protected the brokers who wanted to leave Morgan and find a home at one of the more than 1,200 other Protocol firms and take their valuable client base with them.

 According to Morgan: “Firms have opportunistically joined the Protocol to make a strategic hire and then dropped out.  Firms have invoked the benefits of the Protocol when hiring while using non-Protocol affiliates to circumvent the Protocol when they lose talent”.  Morgan’s departure from the Protocol eleven years after joining, however, is part of its broader strategy of retaining profitable, top producers.  In May, Morgan, along with competitors UBS and Merrill, announced they would be reducing their reliance on recruiting experienced advisers with big, upfront signing bonuses (usually structured as notes forgivable over a period of years) and instead focus on making organizational changes that emphasize building and maintaining existing brokers.  As just one example, Morgan recently announced that its grid payout would be based on a rolling 12 month, rather than being fixed once or twice a year based on the prior year’s.

 We expect to see a sharp uptick in court litigations, temporary restraining orders and preliminary injunctions involving brokers who depart Morgan and take client information with them.  Only time will tell if the other major wire houses- themselves early members of the Protocol- will follow Morgan’s lead in departing the very Protocol they created in 2004.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, or if you or your company require counsel in these areas, contact us today for a confidential, complimentary consultation.

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